Attached files
file | filename |
---|---|
EX-31.2 - CERTIFICATION - OCONEE FINANCIAL CORP | oconee_10q-ex3102.htm |
EX-10.1 - ORDER - OCONEE FINANCIAL CORP | oconee_10q-ex1001.htm |
EX-31.1 - CERTIFICATION - OCONEE FINANCIAL CORP | oconee_10q-ex3101.htm |
EX-32.1 - CERTIFICATION - OCONEE FINANCIAL CORP | oconee_10q-ex3201.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
__________ to __________
Commission
File Number 000-25267
OCONEE
FINANCIAL CORPORATION
|
(Exact
name of Registrant as specified in its
Charter)
|
Georgia
|
58-2442250
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
35
North Main Street
Watkinsville,
Georgia
|
30677
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
706-769-6611
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files. Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:
Large
accelerated filer: o
|
Accelerated
filer: o
|
Non-accelerated
filer: o (Do
not check if a smaller reporting company)
|
Smaller
reporting company: þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
þ
The
number of shares outstanding of the issuer’s common stock as of November 16,
2009 was 899,815.
INDEX
|
Page No | ||
PART
I - FINANCIAL INFORMATION
|
||
Item
1. Financial Statements
|
||
Consolidated
Balance Sheets at September 30, 2009 and December 31, 2008
|
1
|
|
Consolidated
Statements of Operations (unaudited) for the Three Months and the Nine
Months Ended September 30, 2009 and 2008
|
2
|
|
Consolidated
Statements of Comprehensive Income (Loss) (unaudited) for the Three Months
and the Nine Months Ended September 30, 2009 and 2008
|
3
|
|
Consolidated
Statements of Cash Flows (unaudited) for the Nine Months Ended September
30, 2009 and 2008
|
4
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
16
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
22
|
|
Item
4T. Controls and Procedures
|
22
|
|
PART
II - OTHER INFORMATION
|
||
Item
1. Legal Proceedings
|
23
|
|
Item
1A. Risk Factors
|
23
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
23
|
|
Item
3. Defaults Upon Senior Securities
|
23
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
23
|
|
Item
5. Other Information
|
23
|
|
Item
6. Exhibits
|
23
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated
Balance Sheets
September
30, 2009 and December 31, 2008
September
30, 2009
(unaudited)
|
December
31, 2008
|
|||||||
Assets
|
||||||||
Cash
and due from banks, including reserve requirements of
$25,000
|
$ | 23,834,149 | 4,353,492 | |||||
Federal
funds sold
|
- | 15,709,000 | ||||||
Cash
and cash equivalents
|
23,834,149 | 20,062,492 | ||||||
Investment
securities available for sale
|
69,976,505 | 79,761,570 | ||||||
Other
investments
|
556,300 | 679,229 | ||||||
Mortgage
loans held for sale
|
1,810,471 | 1,638,561 | ||||||
Loans,
net of allowance for loan losses of $4,597,659 and
$4,215,262
|
177,228,347 | 191,557,145 | ||||||
Premises
and equipment, net
|
6,456,789 | 6,903,890 | ||||||
Other
real estate owned
|
5,665,233 | 1,776,960 | ||||||
Accrued
interest receivable and other assets
|
5,736,741 | 5,775,732 | ||||||
Total
assets
|
$ | 291,264,535 | 308,155,549 | |||||
Liabilities and Stockholders’
Equity
|
||||||||
Liabilities:
|
||||||||
Deposits
|
||||||||
Noninterest-bearing
|
$ | 28,688,748 | 27,413,165 | |||||
Interest-bearing
|
224,729,830 | 247,624,987 | ||||||
Total
deposits
|
253,418,578 | 275,038,152 | ||||||
Securities
sold under repurchase agreements
|
11,324,052 | 6,453,272 | ||||||
Accrued
interest payable and other liabilities
|
867,909 | 866,937 | ||||||
Total
liabilities
|
265,610,539 | 282,358,361 | ||||||
Stockholders’
equity:
|
||||||||
Common
stock, $2 par value;
|
||||||||
authorized
1,500,000 shares;
|
||||||||
issued
and outstanding 899,815 shares
|
1,799,630 | 1,799,630 | ||||||
Additional
paid-in capital
|
4,243,332 | 4,243,332 | ||||||
Retained
earnings
|
18,885,042 | 19,500,772 | ||||||
Accumulated
other comprehensive income
|
725,992 | 253,454 | ||||||
Total
stockholders’ equity
|
25,653,996 | 25,797,188 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 291,264,535 | 308,155,549 |
See
accompanying notes to consolidated financial statements.
1
OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated
Statements of Operations
For the
Three Months and the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
Income:
|
||||||||||||||||
Loans
|
$ | 2,383,214 | 2,751,772 | $ | 7,152,619 | 9,088,741 | ||||||||||
Investment securities:
|
||||||||||||||||
Tax
exempt
|
173,934 | 197,037 | 557,341 | 648,964 | ||||||||||||
Taxable
|
660,230 | 867,770 | 2,144,829 | 2,761,744 | ||||||||||||
Federal funds sold and other
|
12,175 | 48,431 | 13,168 | 277,840 | ||||||||||||
Total interest income
|
3,229,553 | 3,865,010 | 9,867,957 | 12,777,289 | ||||||||||||
Interest
Expense:
|
||||||||||||||||
Deposits
|
1,380,413 | 1,728,579 | 4,339,981 | 6,201,210 | ||||||||||||
Other
|
99,099 | 72,746 | 288,950 | 103,385 | ||||||||||||
Total interest expense
|
1,479,512 | 1,801,325 | 4,628,931 | 6,304,595 | ||||||||||||
Net interest income
|
1,750,041 | 2,063,685 | 5,239,026 | 6,472,694 | ||||||||||||
Provision
for loan losses
|
240,000 | 368,000 | 1,340,000 | 598,000 | ||||||||||||
Net
interest income after provision for loan losses
|
1,510,041 | 1,695,685 | 3,899,026 | 5,874,694 | ||||||||||||
Other
Income:
|
||||||||||||||||
Service charges on deposit accounts
|
337,357 | 398,774 | 963,543 | 1,150,663 | ||||||||||||
Mortgage
origination fees
|
73,464 | 104,205 | 357,248 | 263,378 | ||||||||||||
Securities
gains, net
|
44,343 | - | 150,291 | 197,264 | ||||||||||||
Income
on other real estate owned
|
171,637 | - | 439,552 | - | ||||||||||||
Other operating income
|
221,795 | 200,904 | 644,310 | 670,704 | ||||||||||||
Total other income
|
848,596 | 703,883 | 2,554,944 | 2,282,009 | ||||||||||||
Other
Expense:
|
||||||||||||||||
Salaries and other personnel expense
|
1,208,095 | 1,087,865 | 3,800,094 | 4,013,963 | ||||||||||||
Net occupancy and equipment expense
|
340,000 | 340,017 | 1,042,153 | 1,039,328 | ||||||||||||
Other operating expense
|
782,502 | 707,782 | 2,569,593 | 2,001,461 | ||||||||||||
Total other expense
|
2,330,597 | 2,135,664 | 7,411,840 | 7,054,752 | ||||||||||||
Earnings (loss) before income taxes
|
28,040 | 263,904 | (957,870 | ) | 1,101,951 | |||||||||||
Income
taxes (benefit)
|
11,146 | 24,705 | (342,140 | ) | 158,900 | |||||||||||
Net earnings (loss)
|
$ | 16,894 | 239,199 | $ | (615,730 | ) | 943,051 | |||||||||
Earnings
(loss) per common share based on average
|
||||||||||||||||
outstanding shares of 899,815
|
$ | 0.02 | 0.27 | $ | (0.68 | ) | 1.05 |
See
accompanying notes to consolidated financial statements.
2
OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated
Statements of Comprehensive Income (Loss)
For the
Three Months and the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
earnings (loss)
|
$ | 16,894 | 239,199 | $ | (615,730 | ) | 943,051 | |||||||||
Other
comprehensive income (loss), net of tax benefit:
|
||||||||||||||||
Unrealized
gains (losses) on securities available for sale:
|
||||||||||||||||
Holding gains (losses) arising during period, net of tax
|
||||||||||||||||
(benefit)
of $623,378, $358,057, $346,179 and ($106,688)
|
1,018,820 | 585,191 | 565,779 | (174,365 | ) | |||||||||||
Reclassification
adjustments for gains included in net
|
||||||||||||||||
earnings
(loss), net of tax of $16,832, $0, $57,050 and
$74,881
|
(27,511 | ) | - | (93,241 | ) | (122,383 | ) | |||||||||
Total other comprehensive income (loss)
|
991,309 | 585,191 | 472,538 | (296,748 | ) | |||||||||||
Comprehensive income (loss)
|
$ | 1,008,203 | 824,390 | $ | (143,192 | ) | 646,303 |
See
accompanying notes to consolidated financial statements.
3
OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated
Statements of Cash Flows
For the
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
earnings (loss)
|
$ | (615,730 | ) | $ | 943,051 | |||
Adjustments
to reconcile net earnings (loss) to net
|
||||||||
cash
provided by operating activities:
|
||||||||
Provision
for loan losses
|
1,340,000 | 598,000 | ||||||
Depreciation,
amortization and accretion
|
441,840 | 496,168 | ||||||
Gains
on sales of securities
|
(150,291 | ) | (197,264 | ) | ||||
Loss
on sales of other real estate owned
|
184,055 | - | ||||||
Change
in assets and liabilities:
|
||||||||
Interest
receivable and other assets
|
(250,138 | ) | (230,863 | ) | ||||
Interest
payable and other liabilities
|
972 | (547,338 | ) | |||||
Mortgage
loans held for sale
|
(171,910 | ) | 536,987 | |||||
Net
cash provided by operating activities
|
778,798 | 1,598,741 | ||||||
Cash
flows from investing activities:
|
||||||||
Proceeds
from sales of investment securities available for sale
|
12,937,169 | 7,320,481 | ||||||
Proceeds
from calls, maturities, and paydowns of
|
||||||||
investment
securities available for sale
|
141,315,102 | 27,205,789 | ||||||
Purchases
of investment securities available for sale
|
(143,423,909 | ) | (22,566,435 | ) | ||||
Proceeds
from redemption of other investments
|
22,500 | 27,500 | ||||||
Net
change in loans
|
8,619,687 | 1,727,903 | ||||||
Purchases
of premises and equipment
|
(25,649 | ) | (188,031 | ) | ||||
Proceeds
from sales of other real estate
|
296,753 | 157,306 | ||||||
Net cash provided by investing activities
|
19,741,653 | 13,684,513 | ||||||
Cash
flows from financing activities:
|
||||||||
Net
change in deposits
|
(21,619,574 | ) | (20,424,969 | ) | ||||
Net
change in securities sold under repurchase agreements
|
4,870,780 | 8,803,785 | ||||||
Dividends
paid
|
- | (1,034,787 | ) | |||||
Net
cash used by financing activities
|
(16,748,794 | ) | (12,655,971 | ) | ||||
Net
increase in cash and cash equivalents
|
3,771,657 | 2,627,283 | ||||||
Cash
and cash equivalents at beginning of period
|
20,062,492 | 20,889,937 | ||||||
Cash
and cash equivalents at end of period
|
$ | 23,834,149 | $ | 23,517,220 |
4
OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated
Statements of Cash Flows, continued
For the
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
2009
|
2008
|
|||||||
Supplemental
cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 4,694,453 | $ | 6,724,678 | ||||
Cash
paid for taxes
|
$ | - | $ | 281,500 | ||||
Noncash
investing and financing activities:
|
||||||||
Transfer
from loans to other real estate owned
|
$ | 4,215,782 | $ | 319,770 | ||||
Change
in net unrealized losses on investment securities
|
||||||||
available
for sale, net of tax benefit
|
$ | 472,538 | $ | (296,748 | ) | |||
Change
in dividends payable
|
$ | - | $ | 1,034,787 |
See
accompanying notes to consolidated financial statements.
5
OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY
Notes to
Consolidated Financial Statements
(Unaudited)
(1) Basis of
Presentation
The
financial statements include the accounts of Oconee Financial Corporation (the
“Corporation”) and its wholly-owned subsidiary, Oconee State Bank (the
“Bank”). All significant intercompany accounts and transactions have
been eliminated in consolidation.
The
following unaudited condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and
regulations. The consolidated financial information furnished herein
reflects all adjustments which are, in the opinion of management, necessary to
present a fair statement of the results of operations and financial position for
the periods covered herein. All such adjustments are of a normal
recurring nature.
Operating
results for the three and nine –month periods ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009. For further information, refer to the financial
statements and footnotes included in the Corporation’s annual report included on
Form 10-K for the year ended December 31, 2008.
Critical Accounting
Policies
The
Corporation’s accounting policies are fundamental to understanding management’s
discussion and analysis of results of operations and financial
condition. Some of the Corporation’s accounting policies require
significant judgment regarding valuation of assets and liabilities and/or
significant interpretation of the specific accounting guidance. A
description of the Corporation’s significant accounting policies can be found in
Note 1 of the Notes to Consolidated Financial Statements in the Company’s 10-K
for the year ended December 31, 2008.
Many of
the Corporation’s assets and liabilities are recorded using various valuation
techniques that require significant judgment as to
recoverability. The collectibility of loans is reflected through the
Corporation’s estimate of the allowance for loan losses. The
Corporation performs periodic detailed reviews of its loan portfolio in order to
assess the adequacy of the allowance for loan losses in light of anticipated
risks and loan losses. In addition, investment securities available
for sale and mortgage loans held for sale are reflected at their estimated fair
value in the consolidated financial statements. Such amounts are
based on either quoted market prices or estimated values derived by the
Corporation using dealer quotes or market comparisons.
(2) Net Earnings (Loss) Per
Common Share
Net
earnings (loss) per common share are based on the weighted average number of
common shares outstanding during the period.
(3) Allowance for Loan
Losses
Changes in the allowance for loan
losses were as follows:
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Balance
at beginning of year
|
$ | 4,215,262 | 3,335,825 | |||||
Amounts
charged off
|
(985,924 | ) | (125,828 | ) | ||||
Recoveries
on amounts previously charged off
|
28,321 | 24,584 | ||||||
Provision
for loan losses
|
1,340,000 | 598,000 | ||||||
Balance
at September 30
|
$ | 4,597,659 | 3,832,581 |
6
(4) Fair Value
Measurements
Effective
January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and
Disclosures, which provides a framework for measuring fair value under
generally accepted accounting principles. FASB ASC Topic 820 applies
to all financial instruments that are being measured and reported on a fair
value basis.
The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures. Securities available-for-sale, derivatives and certain
deposits are recorded at fair value on a recurring
basis. Additionally, from time to time, the Company may be required
to record at fair value other assets on a nonrecurring basis, such as impaired
loans, foreclosed property and held-to-maturity securities. These
nonrecurring fair value adjustments typically involve application of lower of
cost or market accounting or write-downs of individual assets.
Under
FASB ASC Topic 820, the Company groups assets and liabilities at fair value in
three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair
value. These levels are:
Level 1 –
Quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date.
Level 2 –
Significant other observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted prices in markets that are not
active, and other inputs that are observable or can be corroborated by
observable market data.
Level 3 –
Generated from model-based techniques that use at least one significant
assumption based on unobservable inputs for the asset or liability, which are
typically based on an entity’s own assumptions, as there is little, if any,
related market activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair value
hierarchy, the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Securities
Available-for-Sale: Securities available-for-sale are recorded at fair
value on a recurring basis. Fair value measurement is based upon quoted prices,
if available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
Loans Held for Sale:
Loans held for sale are carried at the lower of cost or fair value. The fair
value of loans held for sale is based on what secondary markets are currently
offering for portfolios with similar characteristics. As such, management
classifies loans subjected to recurring fair value adjustments as Level
2.
Impaired Loans: Loans
for which it is probable that payment of interest and principal will not be made
in accordance with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired, management
measures its impairment. The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At September 30, 2009, substantially all of the
impaired loans were evaluated based on the fair value of the collateral. In
accordance with FASB ASC Topic 820, impaired loans where an allowance is
established based on the fair value of collateral require classification in the
fair value hierarchy. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
impaired loan as nonrecurring Level 2. When an appraised value is not available
or management determines the fair value of the collateral is further impaired
below the appraised value and there is no observable market price, the Company
records the impaired loan as nonrecurring Level 3.
7
Foreclosed Assets:
Foreclosed assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or management’s estimation of the
value of the collateral. When the fair value of the collateral is based on an
observable market price, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
foreclosed asset as nonrecurring Level 3.
The
tables below presents the Company’s assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009 and December 31, 2008,
aggregated by the level in the fair value hierarchy within which those
measurements fall.
Balance
at
September
30, 2009
|
||||||||||||||||
(In
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Assets
|
||||||||||||||||
Securities
|
$ | 69,977 | $ | - | $ | 69,977 | $ | - | ||||||||
Loans
held for sale
|
1,810 | - | 1,810 | - |
Balance
at
December
31, 2008
|
||||||||||||||||
(In
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Assets
|
||||||||||||||||
Securities
|
$ | 79,762 | $ | - | $ | 79,762 | $ | - | ||||||||
Loans
held for sale
|
1,639 | - | 1,639 | - |
The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. Generally Accepted
Accounting Principles. These include assets that are measured at the lower of
cost or fair value. The table below presents the Company’s assets and
liabilities measured at fair value on a nonrecurring basis as of September 30,
2009 and December 31, 2008, aggregated by the level in the fair value hierarchy
within which those measurements fall.
Balance
at
September
30, 2009
|
||||||||||||||||
(In
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Assets
|
||||||||||||||||
Impaired
loans
|
$ | 8,610 | $ | - | $ | - | $ | 8,610 | ||||||||
Foreclosed
assets
|
5,665 | - | - | 5,665 |
Balance
at
December
31, 2008
|
||||||||||||||||
(In
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Assets
|
||||||||||||||||
Impaired
loans
|
$ | 17,531 | $ | - | $ | - | $ | 17,531 | ||||||||
Foreclosed
assets
|
1,782 | - | - | 1,782 |
8
For the
nine-month period ending September 30, 2009, the Bank recognized $654,000 in
charge-offs of impaired loans and foreclosed assets reported in the table
above. These charge-offs were primarily due to declining appraised
value of real estate securing the impaired loan. The Bank will
continue to update appraisals regularly and will recognize any declines in
collateral value through further charge-offs.
Fair Value of Financial
Instruments
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash
Equivalents
For cash,
due from banks, and federal funds sold, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
Available for Sale
Fair
values for investment securities are based on quoted market
prices.
Restricted Equity
Securities
The
carrying amount of restricted equity securities approximates fair
value.
Loans and Mortgage Loans
Held for Sale
The fair
value of fixed rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. The fair value of impaired loans is estimated
based on discounted contractual cash flows or underlying collateral value, where
applicable. Mortgage loans held for sale are valued based on the
current price at which these loans could be sold into the secondary
market.
Deposits and Securities Sold
Under Repurchase Agreements
The fair
value of demand deposits, interest-bearing demand deposits, savings, and
securities sold under repurchase agreements is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
Commitments to Extend Credit
and Standby Letters of Credit
Commitments
to extend credit and standby letters of credit are generally short-term and
carry variable interest rates. Therefore, both the carrying value and
estimated fair value associated with these instruments are
immaterial.
The
estimated fair values of the Company’s financial instruments as of September 30,
2009 are as follows:
Carrying
|
Estimated
|
|||||||
Amount
|
Fair Value
|
|||||||
Assets:
|
(In
thousands)
|
|||||||
Cash and cash
equivalents
|
$ | 23,834 | 23,834 | |||||
Investment
securities
|
$ | 69,977 | 69,977 | |||||
Restricted equity
securities
|
$ | 556 | 556 | |||||
Mortgage loans held for
sale
|
$ | 1,810 | 1,810 | |||||
Loans, net
|
$ | 177,228 | 182,595 | |||||
Liabilities:
|
||||||||
Deposits
and securities sold under
|
||||||||
repurchase
agreement
|
$ | 264,743 | 265,688 |
9
(5) Investments
Investment
securities available for sale at September 30, 2009 and December 31, 2008 are as
follows:
September 30, 2009
|
||||||||||||||||
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
Government
sponsored agencies
|
$ | 29,922,926 | 429,729 | 60,211 | 30,292,444 | |||||||||||
State,
county and municipal
|
11,211,070 | 250,986 | 81,656 | 11,380,400 | ||||||||||||
Mortgage-backed
securities
|
26,054,029 | 838,767 | 5,692 | 26,887,104 | ||||||||||||
Other
debt securities
|
1,618,279 | - | 201,722 | 1,416,557 | ||||||||||||
Total
|
$ | 68,806,304 | 1,519,482 | 349,281 | 69,976,505 |
December 31, 2008
|
||||||||||||||||
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
Government
sponsored agencies
|
$ | 37,171,757 | 959,666 | - | 38,131,423 | |||||||||||
State,
county and municipal
|
17,714,238 | 84,212 | 993,961 | 16,804,489 | ||||||||||||
Mortgage-backed
securities
|
22,846,975 | 517,867 | 790 | 23,364,052 | ||||||||||||
Other
debt securities
|
1,620,067 | - | 158,461 | 1,461,606 | ||||||||||||
Total
|
$ | 79,353,037 | 1,561,745 | 1,153,212 | 79,761,570 |
Unrealized
losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, as of
September 30, 2009 and December 31, 2008 are summarized as follows:
September
30, 2009
|
||||||||||||||||
Less
than 12 Months
|
12
Months or More
|
|||||||||||||||
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
Government
sponsored agencies
|
$ | 6,217,188 | 60,211 | - | - | |||||||||||
State,
county and municipal
|
- | - | 1,192,219 | 81,656 | ||||||||||||
Mortgage-backed
securities
|
5,436,209 | 5,692 | - | - | ||||||||||||
Other
debt securities
|
- | - | 1,416,557 | 201,722 | ||||||||||||
$ | 11,653,397 | 65,903 | 2,608,776 | 283,378 |
December
31, 2008
|
||||||||||||||||
Less
than 12 Months
|
12
Months or More
|
|||||||||||||||
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
Government
sponsored agencies
|
$ | - | - | - | - | |||||||||||
State,
county and municipal
|
10,833,908 | 907,749 | 692,675 | 86,212 | ||||||||||||
Mortgage-backed
securities
|
208,311 | 790 | - | - | ||||||||||||
Other
debt securities
|
1,620,067 | 158,461 | - | - | ||||||||||||
$ | 12,662,286 | 1,067,000 | 692,675 | 86,212 |
10
The
unrealized losses on these debt securities in a continuous loss position for
twelve months or more as of September 30, 2009 and December 31, 2008 are
considered to be temporary because they arose due to changing interest rates and
the repayment sources of principal and interest are government backed or are
securities of investment grade issuers. Included in the table above
as of September 30, 2009 were 0 out of 25 securities issued by U.S. government
sponsored agencies, 3 out of 27 securities issued by state and political
subdivisions, 0 of 28 mortgage-backed securities, and 2 of 2 other debt
securities that contained unrealized losses. Included in the table
above as of December 31, 2008 were 30 out of 44 securities issued by state and
political subdivisions that contained unrealized losses, 1 of 22 mortgage-backed
securities, and 2 of 2 other debt securities that contained unrealized
losses. The entire investment portfolio is classified as available
for sale. However, management has no specific intent to sell any
securities, and it is more likely than not that the Company will not have to
sell any security before recovery of its cost basis.
Management
systematically evaluates investment securities for other-than-temporary declines
in fair value on a quarterly basis. This analysis requires management to
consider various factors, which include duration and magnitude of the decline in
value, the financial condition of the issuer or issuers, structure of the
security and Oconee’s intent to sell the security or whether it’s more likely
than not that Oconee would be required to sell the security before its
anticipated recovery in market value. At September 30, 2009, management
performed its quarterly analysis of all securities with an unrealized loss and
concluded no individual securities were other-than-temporarily
impaired.
The
amortized cost and fair value of investment securities available for sale at
September 30, 2009, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized
Cost
|
Estimated
Fair Value
|
|||||||
Due
within one year
|
$ | 430,000 | 439,821 | |||||
Due
from one to five years
|
910,263 | 917,163 | ||||||
Due
from five to ten years
|
12,877,738 | 13,067,323 | ||||||
Due
after ten years
|
28,534,274 | 28,665,094 | ||||||
Mortgage-backed
securities
|
26,054,029 | 26,887,104 | ||||||
$ | 68,806,304 | 69,976,505 |
The
proceeds from the sales and gross gains and gross losses realized by Oconee from
sales of investment securities for the three months and the nine
months ended September 30 were as follows:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Proceeds
from sales
|
$ | 5,448,403 | - | 12,937,169 | 7,320,481 | |||||||||||
Gross
gains realized
|
$ | 52,497 | - | 258,874 | 197,264 | |||||||||||
Gross
losses realized
|
8,154 | - | 108,583 | - | ||||||||||||
Net
gain realized
|
$ | 44,343 | - | 150,291 | 197,264 |
Securities
with a carrying value of approximately $50,252,000 and $63,014,000 at September
30, 2009 and December 31, 2008, respectively, were pledged to secure public
deposits and for other purposes as required by law.
11
Restricted
equity securities consist of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
Federal
Home Loan Bank Stock
|
$ | 556,300 | 606,300 | |||||
Silverton
Financial Services, Inc. Stock
|
- | 100,429 | ||||||
$ | 556,300 | 706,729 |
During
the first quarter of 2009, Oconee recognized an impairment loss of $100,429 on
an equity investment in Silverton Financial Services, the parent company of
Silverton Bank, a financial institution that failed during the quarter. The
impairment loss represents the full amount of Oconee’s investment in
Silverton.
(6) Subsequent
Events
Subsequent
events have been evaluated through November 16, 2009, which is the date the
financial statements were available to be issued. No material
subsequent events have occurred as of that date which would warrant disclosure
in the Company’s Form 10-Q for the period ending September 30,
2009.
(7) Recent
Accounting Pronouncements
In
June 2009, the FASB issued Accounting Standards Update No. 2009-01
(“ASU 2009-01”), Topic 105 –
Generally Accepted Accounting Principles amendments based on Statement of
Financial Accounting Standards No. 168 – The FASB Accounting Standards
Codification TM and the Hierarchy of Generally
Accepted Accounting Principles. ASU 2009-01 amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 168 (“SFAS
168”), The FASB Accounting
Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its
entirety, including the accounting standards update instructions contained in
Appendix B of the Statement. The FASB Accounting Standards Codification
(“Codification”) became the source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of this
Statement, the Codification superseded all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative. This Statement was
effective for Oconee’s financial statements beginning in the interim period
ended September 30, 2009.
Following
this Statement, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates. The FASB does not consider Accounting
Standards Updates as authoritative in their own right. Accounting Standards
Updates serve only to update the Codification, provide background information
about the guidance, and provide the bases for conclusions on the change(s) in
the Codification. FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“Statement 162”), which became effective on
November 13, 2008, identified the sources of accounting principles and the
framework for selecting the principles used in preparing the financial
statements of nongovernmental entities that are presented in conformity with
GAAP. Statement 162 arranged these sources of GAAP in a hierarchy for users to
apply accordingly. Upon becoming effective, all of the content of the
Codification carries the same level of authority, effectively superseding
Statement 162. In other words, the GAAP hierarchy has been modified to include
only two levels of GAAP: authoritative and non-authoritative. As a result, this
Statement replaces Statement 162 to indicate this change to the GAAP hierarchy.
The adoption of the Codification and ASU 2009-01 did not have any effect on
Oconee’s results of operations or financial position. All references to
accounting literature included in the notes to the financial statements have
been changed to reference the appropriate sections of the
Codification.
In
June 2009, the FASB issued Accounting Standards Update No. 2009-02
(“ASU 2009-02”), Omnibus
Update – Amendments to Various Topics for Technical Corrections. The
adoption of ASU 2009-02 did not have any effect on Oconee’s results of
operations, financial position or disclosures.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-03
(“ASU 2009-03”), SEC Update –
Amendments to Various Topics Containing SEC Staff Accounting Bulletins.
ASU 2009-03 represents technical corrections to various topics containing SEC
Staff Accounting Bulletins to update cross-references to Codification text. This
ASU did not have any effect on Oconee’s results of operations, financial
position or disclosures.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-04
(“ASU 2009-04”), Accounting
for Redeemable Equity Instruments – Amendment to Section 480-10-S99.
ASU 2009-04 represents an update to Section 480-10-S99, Distinguishing Liabilities from
Equity, per Emerging Issues Task Force (“EITF”) Topic D-98, Classification and Measurement of
Redeemable Securities. ASU 2009-04 did not have any effect on Oconee’s
results of operations, financial position or disclosures.
12
In
August 2009, the FASB issued Accounting Standards Update No. 2009-05
(“ASU 2009-05”), Fair Value
Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair
Value. ASU 2009-05 applies to all entities that measure liabilities at
fair value within the scope of ASC Topic 820. ASU 2009-05 provides clarification
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value using one or more of the following techniques:
1.)
|
A
valuation technique that uses:
|
a.
|
The
quoted price of the identical liability when traded as an
asset
|
b.
|
Quoted
prices for similar liabilities or similar liabilities when traded as
assets.
|
2.)
|
Another
valuation technique that is consistent with the principles of ASC Topic
820. Two examples would be an income approach, such as a technique that is
based on the amount at the measurement date that the reporting entity
would pay to transfer the identical liability or would receive to enter
into the identical liability.
|
The
amendments in ASU 2009-5 also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. It also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. The guidance provided in ASU 2009-5 is
effective for Oconee in the fourth quarter of 2009. Because Oconee does not
currently have any liabilities that are recorded at fair value, the adoption of
this guidance will not have any impact on results of operations, financial
position or disclosures.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-06 (“ASU 2009-06”), Income Taxes (Topic 740) –
Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities. ASU 2009-06 provides
additional implementation guidance on accounting for uncertainty in income taxes
by addressing 1.) whether income taxes paid by an entity are attributable to the
entity or its owners, 2.) what constitutes a tax position for a pass-through
entity or a tax-exempt not-for-profit entity, and 3.) how accounting for
uncertainty in income taxes should be applied when a group of related entities
comprise both taxable and nontaxable entities. ASU 2009-06 also eliminates
certain disclosure requirements for nonpublic entities. The guidance and
disclosure amendments included in ASU 2009-06 were effective for Oconee in the
third quarter of 2009 and had no impact on results of operations, financial
position or disclosures.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-07 (“ASU 2009-07”), Accounting for Various Topics – Technical
Corrections to SEC Paragraphs. ASU 2009-07 represents technical corrections to
various topics containing SEC guidance. This ASU did not have any effect on
Oconee’s results of operations, financial position or disclosures.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-08 (“ASU 2009-08”), Earnings Per Share – Amendments to
Section 260-10-S99. ASU 2009-08 represents technical corrections to Topic
260-10-S99, Earnings per Share, based on EITF Topic D-53, Computation of
Earnings Per Share for a Period that Includes a Redemption or an Induced
Conversion of Preferred Stock. This ASU did not have any effect on Oconee’s
results of operations, financial position or disclosures.
13
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-09 (“ASU 2009-09”), Accounting for Investments – Equity Method and
Joint Ventures and Accounting for Equity-Based Payments to Non-Employees –
Amendments to Sections 323-10-S99 and 505-50-S99. ASU 2009-09 represents a
correction to Section 323-10-S99-4, Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity Method Investee.
Section 323-10-S99-4 was originally entered into the Accounting Standards
Codification incorrectly. Additionally, it adds observer comment Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted to
Other Than Employees to the Codification. This ASU did not have any effect on
Oconee’s results of operations, financial position or disclosures.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-10 (“ASU 2009-10”), Financial Services – Broker and Dealers:
Investments – Other – Amendment to Subtopic 940-325. ASU 2009-10 codifies the
Observer comment in paragraph 17 of EITF 02-3, Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management. This ASU did not have any effect on Oconee’s
results of operations, financial position or disclosures.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-11 (“ASU 2009-11”), Extractive Activities – Oil and Gas –
Amendment to Section 932-10-S99. ASU 2009-11 represents a technical
correction to the SEC Observer comment in EITF 90-22, Accounting for
Gas-Balancing Arrangements. This ASU is not applicable to Oconee and therefore
did not have any effect on Oconee’s results of operations, financial position or
disclosures.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-12 (“ASU 2009-12”), Fair Value Measurements and Disclosures (Topic
820) – Investments in Certain Entities That Calculate Net Asset Value per Share
(or Its Equivalent). ASU 2009-12 is not applicable to Oconee and therefore did
not have any effect on Oconee’s results of operations, financial position or
disclosures.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13
(“ASU 2009-13”), Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force. ASU 2009-13
addresses the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit. Subtopic 605-25, Revenue Recognition – Multiple-Element
Arrangements, establishes the accounting and reporting guidance for arrangements
under which the vendor will perform multiple revenue-generating activities.
Specifically, this subtopic addresses how to separate deliverables and how to
measure and allocate arrangement consideration to one or more units of
accounting. The amendments in this ASU will be effective for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010 with early adoption permitted. This ASU is not expected to
have any effect on Oconee’s results of operations, financial position or
disclosures.
14
In
October 2009, the FASB issued Accounting Standards Update No. 2009-14
(“ASU 2009-14”), Software (Topic 985) – Certain Revenue Arrangements That
Include Software Elements – a consensus of the FASB Emerging Issues Task Force.
ASU 2009-14 addresses concerns raised by constituents relating to the accounting
for revenue arrangements that contain tangible products and software. The
amendments in this ASU will be effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010 with early adoption permitted. This ASU is not applicable to
Oconee and therefore did not have any effect on Oconee’s results of operations,
financial position or disclosures.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-15
(“ASU 2009-15”), Accounting for Own-Share Lending Arrangements in Contemplation
of Convertible Debt Issuance or Other Financing. ASU 2009-15 provides accounting
guidance for own-share lending arrangements issued in contemplation of the
issuance of convertible debt or other financing arrangements. An entity, for
which the cost to an investment banking firm or third-party investors of
borrowing its shares is prohibitive, may enter into share-lending arrangements
that are executed separately but in connection with a convertible debt offering.
Although the convertible debt instrument is ultimately sold to investors, the
share-lending arrangement is an agreement between the entity and an investment
bank and is intended to facilitate the ability of investors to hedge the
conversion option in the entity’s convertible debt. Loaned shares are excluded
from basic and diluted earnings per share unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the
basic and diluted earnings-per-share calculation. If dividends on the loaned
shares are not reimbursed to the entity, any amounts, including contractual
dividends and participation rights in undistributed earnings, attributable to
the loaned shares shall be deducted in computing income available to common
shareholders, in a manner consistent with the two-class method in paragraph
260-10-45-60B. This ASU did not have any effect on Oconee’s results of
operations, financial position or disclosures.
15
tem
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking
Statements
This discussion contains
forward-looking statements under the private Securities Litigation Reform Act of
1995 that involve risk and uncertainties. Although the Corporation
believes that the assumptions underlying the forward-looking statements
contained in the discussion are reasonable, any of the assumptions could be
inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be
accurate. Factors that could cause actual results to differ from
results discussed in forward-looking statements include, but are not limited to:
economic conditions (both generally and in the markets where the Corporation
operates); competition from other providers of financial services offered by the
Corporation; government regulations and legislation; changes in interest rates;
material unforeseen changes in the financial stability and liquidity of the
Corporation’s credit customers, all of which are difficult to predict and which
may be beyond the control of the Corporation. The Corporation
undertakes no obligation to revise forward-looking statements to reflect events
or changes after the date of this discussion or to reflect the occurrence of
unanticipated events.
Financial
Condition
Since mid-2007, and particularly during
the second half of 2008 and into 2009, the financial markets and economic
conditions generally were materially and adversely affected by significant
declines in the values of nearly all asset classes and by a serious lack of
liquidity. This was initially triggered by declines in home prices
and the values of subprime mortgages, but spread to all commercial and
residential mortgages as property prices declined rapidly and to nearly all
asset classes. The effect of the market and economic downturn also
spread to other areas of the credit markets and in the availability of
liquidity. The magnitude of these declines led to a crisis of
confidence in the financial sector as a result of concerns about the capital
base and viability of certain financial institutions. During this
period, interbank lending and commercial paper borrowing fell sharply,
precipitating a credit freeze for both institutional and individual
borrowers. Unemployment has also increased
significantly.
These factors have magnified the need
for careful management of the Bank going forward. Regulatory scrutiny
within the banking industry has increased significantly, and as a result, the
Bank’s management team and Board of Directors have implemented, and will
continue to implement strategies to guide the Bank through this difficult
market. Management has focused on strategies to increase revenues and
control expenses in an effort to return the Bank to profitability. In
addition, loan underwriting standards have been tightened and credit risk will
continue to be closely monitored. Balance sheet management strategies
have been developed which will, in all likelihood, result in a decline in
investment securities and deposit balances and in total assets in order to
reduce interest expense and produce a better match in the bank’s funding and its
funding needs. In addition, the Board of Directors has engaged a
consultant to evaluate the Bank’s current capital base and develop a strategy
for capital management going forward.
Total
assets at September 30, 2009 were $291,265,000, representing a $16,891,000
(5.48%) decrease from December 31, 2008. Investment securities
decreased $9,785,000 as compared to December 31, 2008, primarily as a result of
the Bank’s decision to allow the maturities and calls of investment securities
to provide liquidity to replace deposits in a designed effort to shrink the
Bank’s balance sheet. Loans decreased $18,563,000 (9.48%) at
September 30, 2009 as compared to December 31, 2008, primarily due to loan
pay-downs and the shifting of $4,216,000 from loans to other real estate owned
during the first nine months of 2009. Deposits decreased $21,619,000
(7.86%) from December 31, 2008. The decrease in deposits is primarily
attributable to decreases in interest-bearing checking accounts of $21,097,000
as compared to December 31, 2008 balances. Securities sold under
repurchase agreements increased $4,871,000 at September 30, 2009 as compared to
December 31, 2008, primarily due to two significant deposit relationships
shifting their deposit relationships from interest-bearing checking and time
deposit accounts into repurchase agreements. The allowance
for loan losses at September 30, 2009 was $4,598,000, compared to the December
31, 2008 balance of $4,215,000, representing 2.59% of total loans at September
30, 2009, compared to 2.15% of total loans at December 31, 2008. Cash and cash
equivalents increased $3,772,000 from December 31, 2008. Total
stockholders’ equity at September 30, 2009 of $25,687,000 decreased $110,000
(0.43%) from December 31, 2008 due to a net loss for the first nine months of
2009 of $616,000, offset by an increase in market value of investment
securities, net of tax, of $473,000.
16
The
following table presents a summary of the Bank’s loan portfolio by loan type at
September 30, 2009 (dollars are in thousands).
|
Amount
|
Percentage
|
||||||
(In
thousands)
|
||||||||
Commercial,
financial and agricultural
|
$ | 28,258 | 15.6% | |||||
Real
estate – mortgage
|
107,078 | 58.9% | ||||||
Real
estate – commercial construction
|
38,725 | 21.3% | ||||||
Real
estate – consumer construction
|
799 | 0.4% | ||||||
Consumer
|
6,966 | 3.8% | ||||||
Total
loans
|
$ | 181,826 | 100.0% |
The total amount of nonperforming
assets, which includes nonaccruing loans, other real estate owned, repossessed
collateral and loans for which payments are more than 90 days past due was
$28,442,000 at September 30, 2009, representing a decrease of $2,135,000 (6.98%)
from December 31, 2008. This decrease is primarily attributable to a
decrease of $6,569,000 in nonaccrual loans, offset by increases of $3,888,000 in
other real estate owned and $550,000 in loans 90 days or more past
due. The decrease in nonaccrual loans is primarily attributable to
the payoff of a $4,100,000 loan that was on nonaccrual status. The
payoff occurred during the third quarter of 2009 and was for the full carrying
amount of the loan, so there was no charge-off associated with the reduction in
outstanding balance. Total nonperforming assets were 16.05% of total loans at
September 30, 2009, compared to 15.62% at December 31,
2008. Nonperforming assets represented 9.76% of total assets at
September 30, 2009, compared to 9.92% of total assets at December 31,
2008. Nonaccrual loans represented 12.53% of total loans outstanding
at September 30, 2009, compared to 14.70% of total loans outstanding at December
31, 2008. There were no related party loans which were considered to
be nonperforming at September 30, 2009. A summary of non-performing
assets at September 30, 2009, December 31, 2008 and September 30, 2008 is
presented in the following table (dollars are in thousands).
September
30, 2009
|
December
31, 2008
|
September
30, 2008
|
||||||||||
Other
real estate
|
$ | 5,665 | 1,777 | 150 | ||||||||
Repossessions
|
- | 5 | 4 | |||||||||
Non-accrual
loans
|
22,203 | 28,772 | 19,656 | |||||||||
Accruing
loans 90 days or more
past
due
|
550 | 24 | 6 |
The table
below details the changes in other real estate owned for the nine months ending
September 30, 2009 and 2008 (dollars are in thousands).
2009
|
2008
|
|||||||
Balance
at January 1
|
1,777 | - | ||||||
Transfer
from loans to other real estate
|
4,216 | 320 | ||||||
Capital
improvements on other real estate
|
165 | - | ||||||
Sales
of other real estate
|
(297 | ) | (157 | ) | ||||
Write-downs
on other real estate
|
(196 | ) | (13 | ) | ||||
Balance
at September 30
|
5,665 | 150 |
17
As of
September 30, 2009, the allowance for loan losses was allocated as follows
(dollars are in thousands).
Allocation
of Allowance for Loan
Losses
|
%
of Allowance for Loan
Losses
|
%
of Loans by Category to
Total Loans
|
||||||||||
Commercial,
financial and agricultural
|
$ | 1,004 | 21.8 | % | 15.6 | % | ||||||
Real
Estate - Commercial Construction
|
1,567 | 34.1 | % | 21.3 | % | |||||||
Consumer
|
278 | 6.1 | % | 3.8 | % | |||||||
Real
Estate - Mortgage
|
1,738 | 37.8 | % | 58.9 | % | |||||||
Unallocated
|
11 | 0.2 | % | 0.4 | % | |||||||
Total
|
$ | 4,598 | 100.0 | % | 100.0 | % |
During the first quarter 2009, the Bank
formed Motel Holdings Georgia, Inc., a subsidiary corporation for the purpose of
holding a motel that was foreclosed upon by the Bank in January
2009. At September 30, 2009, the carrying amount of the hotel in
other real estate owned was $2,537,000. This subsidiary was set up to
limit the Bank’s liability on the operations of the motel and to make a more
clear separation of the income and expenses relating to the motel and the Bank’s
ordinary lines of business. The Bank has contracted with an
independent hospitality management company to operate the motel while the Bank
markets the motel for sale.
At
September 30, 2009, the Corporation had loan concentrations in the housing
industry and in the hotel and motel industry. Total commitment
amounts for hotel and motel loans were $19,917,000 at September 30, 2009, of
which $19,449,000 was funded and outstanding. The Corporation’s
primary risk relating to the hotel and motel industry is a slowdown in the
travel and tourism industry.
As of
September 30, 2009, the Corporation had total commitments for construction and
development loans of $28,059,000, of which $24,975,000 was funded and
outstanding. The local housing industry has slowed considerably over
the past 12 to 18 months, as has occurred at the state and national
level. New loan requests have been down as compared to prior periods
due to this slowdown. The immediate challenge for the Bank is to
finance builders and developers with the financial strength to deal with the
current weaker demand, while working with financially weaker builders in an
attempt to help them work through this economic downturn.
On August
18, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist (the “Consent Agreement”) with the Federal Deposit
Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and
Finance (the “GDBF”), whereby the Bank consented to the issuance of an Order to
Cease and Desist (the “Order”).
Among
other things, the Order provides that, unless otherwise agreed by the FDIC and
GDBF:
|
·
|
the
Board of Directors of the Bank must increase its participation in the
affairs of the Bank and establish a Board committee responsible for
ensuring compliance with the Order;
|
|
·
|
the
Bank must have and retain qualified management and notify the FDIC and the
GDBF in writing when it proposes to add any individual to the Bank’s Board
of Directors or employ any individual as a senior executive
officer;
|
|
·
|
the
Bank must have and maintain a Tier 1 (Leverage) Capital ratio of not less
than 8% and a Total Risk-based Capital ratio of at least
10%;
|
|
·
|
the
Bank must collect or charge-off problem
loans;
|
|
·
|
the
Bank must formulate a written plan to reduce the Bank’s adversely
classified assets in accordance with a defined asset reduction
schedule;
|
|
·
|
the
Bank may not extend any additional credit to, or for the benefit of, any
borrower who has a loan or other extension of credit from the Bank that
has been charged-off or adversely classified and is
uncollected;
|
18
|
·
|
the
Bank must strengthen its lending and collection policy to provide
effective guidance and control over the Bank’s lending
functions;
|
|
·
|
the
Bank must perform a risk segmentation analysis with respect to
concentrations of credit and reduce such
concentrations;
|
|
·
|
the
Board of Directors of the Bank must review the adequacy of the allowance
for loan and lease losses (the “ALLL”) and establish a comprehensive
policy for determining the adequacy of the
ALLL;
|
|
·
|
the
Bank must revise its budget and include formal goals and strategies to
improve the Bank’s net interest margin, increase interest income, reduce
discretionary expenses and improve and sustain earnings of the
Bank;
|
|
·
|
the
Bank may not pay a cash dividend to Oconee Financial
Corporation;
|
|
·
|
the
Board of Directors of the Bank must strengthen its asset/liability
management and interest rate risk policies and liquidity contingency
funding plan,
|
|
·
|
the
Bank may not accept, renew or rollover brokered deposits without obtaining
a brokered deposit waiver from the
FDIC.
|
|
·
|
the
Bank must eliminate or correct all violations of law and contraventions of
policy;
|
|
·
|
the
Bank must submit quarterly reports to the FDIC and GDBF regarding
compliance with the Order.
|
The
provisions of the Order will remain effective until modified, terminated
suspended or set aside by the FDIC. Management of the Bank has
developed a plan for compliance with the Order and has been given authority by
the Board of Directors to institute that plan. The primary focuses of
the plan going forward will be reducing classified and non-performing assets,
maintaining adequate levels of capital and returning the Bank to profitable
operating levels. The Bank submitted its first quarterly report to
the FDIC and GBBF on October 30. As of that date, the Bank was in
full compliance with the Order.
Results
of Operations
Net interest income decreased
$1,234,000 (19.06%) in the first nine months of 2009 compared to the same period
for 2008 as a result of a decline in the interest rate spread and a decrease in
average interest-earning assets. The Bank’s net interest margin for
the first nine months of 2009 was 2.54%, compared to 3.07% for the same time
period during 2008. Yield on interest earning assets for the
nine-month period ending September 30, 2009 was 4.79%, compared to 5.91% for the
nine-month period ending September 30, 2008. Average rate paid on
interest bearing liabilities was 2.43% for the nine months ending September 30,
2009, compared to 2.84% for the same period during 2008. The primary
reasons for the changes in yield on interest earning assets are a significant
increase in the average balances of nonaccrual loans in the first nine months of
2009 as compared to the same time period for 2008 and a lower interest rate
environment in the first nine months of 2009 as compared 2008. The
reduction in the average rate paid on interest bearing liabilities is a result
of the lower interest rate environment in 2009 and a reduction of $2,425,000 in
average interest-bearing deposits during the first nine months of 2009 as
compared to the same time period in 2008.
Interest
income for the first nine months of 2009 was $9,868,000, representing a decrease
of $2,909,000 (22.77%) as compared to the same period in
2008. Interest expense for the first nine months of 2009 decreased
$1,676,000 (26.58%) compared to the same period in 2008. The decrease
in interest income during the first nine months of 2009 compared to the same
period in 2008 is primarily attributable to a lower average level of
interest-earning assets at lower interest rate levels in 2009 as compared to
2008. Year-to-date average interest earning assets were $22,281,000
lower during the first nine months of 2009 as compared to 2008. This
is primarily due to a reduction in average interest-earning loans of $3,776,000
and federal funds sold of $11,300,000. The decrease in interest
expense is primarily attributable to a lower interest rate environment for
deposits.
Net
interest income for the quarterly period ended September 30, 2009 was
$1,750,000, as compared to $2,064,000 for the same time period in
2008. The reduction in net interest income in 2009 was due to a
decline in interest income of $635,000, offset by a decrease in interest expense
of $322,000. The decline in interest income was primarily due to
lower levels of interest-earning assets in 2009 as compared to
2008. The decrease in interest expense is due to a lower interest
rate environment in 2009 as well as lower average levels of interest-bearing
liabilities in 2009 as compared to 2008.
19
The Bank analyzes its allowance for
loan losses on a monthly basis. Additions to the allowance for loan
losses are made by charges to the provision for loan losses. Loans
deemed to be uncollectible are charged against the allowance for loan
losses. Recoveries of previously charged off amounts are credited to
the allowance for loan losses. For the nine months ended September
30, 2009, the provision for loan losses was $1,340,000, compared to $598,000 for
the same period in 2008. The provision for loan
losses increased in 2009 as compared to 2008 as a result of a higher level of
higher levels of historic charge-offs at September 30, 2009 as compared to
September 30, 2008. The historic charge-offs are primarily tied to
the construction and real estate development industry, which has continued to
experience a prolonged downturn throughout 2009. The historic
charge-offs are part of the calculation used to determine the adequacy of the
loan loss reserve. The nature of the process by which the Corporation
determines the appropriate allowance for loan losses requires the exercise of
considerable judgment. It is management’s belief that the allowance
for loan losses is adequate to absorb possible losses in the
portfolio.
Other income for the first nine months
of 2009 increased $273,000 (11.96%) compared to the first nine months of
2008. This increase is primarily attributable to increases of
$440,000 in income on other real estate and $94,000 in mortgage origination
fees, offset by a $168,000 decline in non-sufficient funds service charges and a
$47,000 reduction in net gains on sales of investment securities. The
net gain on sales of investment securities during 2009 includes a loss of
$100,000 on Silverton Financial Services stock. The loss on Silverton
Financial Services stock was incurred due to the failure of Silverton Bank,
N.A., a subsidiary of Silverton Financial Services.
The
income on other real estate owned is revenue generated by the operation of a
motel that the Bank foreclosed on in February of 2009. The motel is
owned by Motel Holdings Georgia, Inc., a wholly-owned subsidiary of the Bank,
and is operated through a management contract with a hospitality
company. The revenues and expenses from the motel operations are
consolidated with the Bank operations for purposes of financial statement
disclosure.
Other expenses for the first nine
months of 2009 increased $357,000 (5.06%) compared to the first nine months in
2008. The increase is primarily attributable to an increase in Federal
Deposit Insurance Corporation (FDIC) insurance assessments of $357,000 and an
increase in expenses on other real estate of $424,000, offset by reductions of
salaries and other personnel expense of $214,000 and advertising and marketing
expense of $320,000. The increase in FDIC insurance assessments was
primarily due to a one-time assessment that the FDIC enacted as of June 30, 2009
to all of its member institutions. The increase in expenses on other
real estate was due to operating expenses of $386,000 associated with the
foreclosed motel mentioned in the previous paragraph.
Other
income increased during the third quarter 2009 by $145,000 as compared to 2008
due to an increase in income on other real estate owned of $172,000 from the
operation of a foreclosed motel. Other expenses for the third quarter
of 2009 were $2,331,000, an increase of $195,000 over 2008
expenses. The increase is primarily attributable to an increase in
other operating expenses of $75,000 and an increase in salary and personnel
expenses of $120,000.
Effective July 31, 2009, the Bank
closed its Athens branch due to continued decline in transaction
activity. The branch is leased until June 2010, and the Bank is
actively pursuing a sub-lease for the remainder of the lease term.
The
Bank’s effective tax rate was 36% and 14% for the nine months ended September
30, 2009 and 2008, respectively. The increase in the effective tax rate in 2009
is due to projected tax benefits due to the Bank’s net operating loss position.
In addition, for the nine-month period ended September 30, 2008, the Bank was
showing profitable operating income. The taxable portion of the
income was decreased by tax-free income on investment securities when
calculating income taxes. Because the percentage of tax-free income
was considerable when compared to total income, the resulting increase in the
Bank’s effective tax rate was more significant than in past
periods.
Interest
rate sensitivity
Interest rate sensitivity is a function
of the repricing characteristics of the Bank’s portfolio of assets and
liabilities. These repricing characteristics are the time frames
within which the interest earning assets and liabilities are subject to change
in interest rates either at replacement, repricing or maturity during the life
of the instruments. One method to measure interest rate sensitivity
is through a repricing gap. The gap is calculated by taking all
assets that reprice or mature within a given time frame and subtracting all
liabilities that reprice or mature during that time frame. A negative
gap (more liabilities repricing than assets) generally indicates that the Bank’s
net interest income will decrease if interest rates rise and will increase if
interest rates fall. A positive gap generally indicates that the
Bank’s net interest income will decrease if rates fall and will increase if
rates rise.
20
The Bank also measures its short-term
exposure to interest rate risk by simulating the impact to net interest income
under several rate change levels. Interest-earning assets and
interest-bearing liabilities are rate shocked to stress test the impact to the
Bank’s net interest income and margin. The rate shock levels span
three 100 basis point increments up and down from current interest
rates. This information is used to monitor interest rate exposure
risk relative to anticipated interest rate trends. Asset/liability
management strategies are developed based on this analysis in an effort to limit
the Bank’s exposure to interest rate risk.
The Bank tracks its interest rate
sensitivity on a monthly basis using a model, which applies betas to various
types of interest-bearing deposit accounts. The betas represent the
Bank’s expected repricing of deposit rates based on historical data provided
from a call report driven database. The betas are used because it is
not likely that deposit rates would change the full amount of a prime rate
increase or decrease.
At September 30, 2009, the difference
between the Bank’s liabilities and assets repricing or maturing within one year,
after applying the betas, was $11,212,000, indicating that the Bank was
liability sensitive. Due to a large percentage of the Bank’s floating
rate loans being currently priced at floor rates, meaning that the loans will
not reprice in a falling rate environment, rate shock data show that the Bank’s
net interest income would increase $175,000 on an annual basis if rates
decreased 100 basis points, and would increase $19,000 on an annual basis if
rates increased 100 basis points. The primary reason for the Bank’s
shift to a liability sensitive position during the first three quarters of 2009
from an asset sensitive position at December 31, 2008 was the Bank’s decision to
shift assets from fed funds sold to a non-interest bearing account at its
primary correspondent bank, as discussed earlier. This shift resulted
in a decrease in the Bank’s short-term interest bearing assets and an increase
in its non-interest earning assets, which resulted in the Bank’s rate
sensitivity shift.
Certain shortcomings are inherent in
the method of analysis presented in the foregoing paragraph. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees or at different points
in time to changes in market interest rates. Additionally, certain
assets, such as adjustable-rate mortgages, have features that restrict changes
in interest rates, both on a short-term basis and over the life of the
asset. Changes in interest rates, prepayment rates, early withdrawal
levels and the ability of borrowers to service their debt, among other factors,
may change significantly from the assumptions made above. In
addition, significant rate decreases would not likely be reflected in liability
repricing and therefore would make the Bank more sensitive in a falling rate
environment.
Liquidity
The Corporation must maintain, on a
daily basis, sufficient funds to cover the withdrawals from depositors’ accounts
and to supply new borrowers with funds. To meet these obligations,
the Corporation keeps cash on hand, maintains account balances with its
correspondent banks, and purchases and sells federal funds and other short-term
investments. Asset and liability maturities are monitored in an
attempt to match these to meet liquidity needs. It is the policy of
the Corporation to monitor its liquidity to meet regulatory requirements and its
local funding requirements.
The Corporation monitors its liquidity
position weekly. The primary tool used in this analysis is an
internal calculation of a liquidity ratio. This ratio is calculated
by dividing the Corporation’s short-term and marketable assets, including cash,
federal funds sold, unpledged investment securities and other secondary sources
of liquidity, such as borrowing capacity from correspondent banks, by the sum of
the Corporation’s deposit liabilities. At September 30, 2009, the
Corporation’s liquidity ratio was 21.1%. This level of liquidity is
within the Bank’s goal of maintaining a sufficient level of liquidity in all
expected economic environments.
The Corporation maintains relationships
with correspondent banks that can provide it with funds on short notice, if
needed through secured lines of credit and securities repurchase
agreements. Additional liquidity is provided to the Corporation
through available Federal Home Loan Bank advances, none of which were
outstanding at September 30, 2009.
During the first nine months of 2009,
cash and cash equivalents increased $3,772,000 to a total of $23,834,000 at
September 30, 2009. Cash inflows from operations totaled $779,000
during the first nine months of 2009, while inflows from financing activities
totaled $16,749,000, comprised primarily of net decreases of $21,620,000 in
deposits, offset by net increases in securities sold under repurchase agreements
of $4,871,000.
21
Investing activities provided
$19,742,000 of cash and cash equivalents, consisting primarily of proceeds from
calls, maturities and paydowns of investment securities of $141,315,000,
proceeds from the sales of investment securities of $12,937,000 and net
decreases in loans of $8,620,000, offset by purchases of investment securities
of $143,424,000. At September 30, 2009, the Bank had $69,977,000 of
investment securities available for sale.
Contractual
Obligations and Commitments
The Corporation is party to financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit, standby letters of credit and financial
guarantees. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized on the balance
sheet. The contract amounts of these instruments reflect the extent
of the involvement of the Corporation in particular classes of financial
instruments. At September 30, 2009, the contractual amounts of the
Corporation’s commitments to extend credit and standby letters of credit were
$27,826,000 and $447,000, respectively.
Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have
fixed expiration dates and because they may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. Standby letters of credit and financial guarantees
written are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party.
Capital
The following tables present the Bank’s
regulatory capital position at September 30, 2009, based on the regulatory
capital requirements of federal banking agencies. The capital ratios
of the Corporation are essentially the same as those of the Bank at September
30, 2009 and therefore only the Bank’s ratios are presented.
Risk-Based Capital
Ratios
|
||
Tier
1 Capital, Actual
|
12.3%
|
|
Tier
1 Capital minimum requirement
|
4.0%
|
|
Excess
|
8.3%
|
|
Total
Capital, Actual
|
13.5%
|
|
Total
Capital minimum requirement
|
8.0%
|
|
Excess
|
5.5%
|
|
Leverage Ratio
|
||
Tier
1 Capital to adjusted total assets
|
8.2%
|
|
Minimum
leverage requirement
|
4.0%
|
|
Excess
|
4.2%
|
Item
3. Qualitative and Quantitative
Disclosures about Market Risk.
Not applicable because the registrant
is a smaller reporting company.
Item
4T. Controls and
Procedures.
Our management, including our principal
executive officer and principal financial officer, supervised and participated
in an evaluation of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934) and pursuant to such evaluation, concluded that
our disclosure controls and procedures were effective as of September 30,
2009. Disclosure controls and procedures are those controls and
procedures which ensure that information required to be disclosed in this filing
is accumulated and communicated to management and is recorded, processed,
summarized and reported in a timely manner and in accordance with Securities and
Exchange Commission rules and regulations.
22
There were no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART
II. OTHER INFORMATION
Item
1. Legal
Proceedings
None
Item
1A. Risk
Factors
Not
applicable because the registrant is a smaller reporting company.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
None
None
None
Item
5. Other
Information
None
(a)
|
Exhibits
|
|
10.1
|
Order
to Cease and Desist, dated August 18, 2009, and Stipulation and Consent
thereto.
|
|
31.1
|
Certification
by B. Amrey Harden, CEO and President of the Corporation, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
by Steven A. Rogers, Vice President and Chief Financial Officer of the
Corporation, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
Certification
of the Chief Executive Officer and the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
23
SIGNATURES
In accordance with the requirements of
the Exchange Act, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OCONEE
FINANCIAL CORPORATION
By: /s/ B.
Amrey
Harden
B.
Amrey Harden, President and CEO
(Principal
Executive Officer)
Date:
November 16,
2009
By: /s/ Steven A. Rogers
Steven
A. Rogers, Vice President and CFO
(Principal
Financial Officer)
Date:
November 16,
2009
|
|
24